Mamaearth Scaling Up With A House Of Brands, Says Jefferies

At a time when fast-moving consumer goods incumbents are probably trying to tilt more towards profitability over growth, Honasa Consumer Ltd. has a positive growth priority, according to Jefferies.

The company enjoys a significant moat as a scaled-up internet-first franchise. It has been able to transform itself into a house of brands, with 33% of revenue now coming from newer brands, according to the brokerage.

Honasa Consumer, owner of the 'Mamaearth' brand, got a 'buy' rating as Jefferies initiated coverage on the company. The brokerage expects it to deliver sector-leading revenue growth over the coming years, coupled with improving profitability.

Jefferies has set a target price of Rs 520, implying an upside return potential of 48.82%.

The company has emerged as a leading digital-first beauty and personal care franchise in India, commanding a 29% share of the direct-to-consumer BPC market and 5% of overall online BPC, it said in a Nov. 10 note.

Jefferies expects Honasa to deliver a sector-leading 27% revenue CAGR. Growth should moderate for the flagship Mamaearth brand (14% CAGR) given its absolute scale, although new brands should continue to ramp up at a rapid pace (60% CAGR).

Growth should be accompanied by further improvement in profitability, led by scale benefits over key cost items, notably ad spends.

"We expect Honasa to reach double-digit Ebitda margins by FY26e vs. 6% levels in 1Q FY24. This should enable a strong ramp-up in absolute Ebitda and pre-exceptional EPS, both rising sharply over FY23 levels," it said.

"In less than eight years, the company has ramped up to more than Rs 18 billion of annualised revenue (1QFY24) and has expanded from a single flagship brand (Mamaearth) to a portfolio of six brands, largely through organic growth, along with some M&A too," Jeffries said.

The revenue share of new brands has inched up to 35% in the first quarter of FY24. Similarly, the company has also moved beyond its DTC origins, expanding aggressively in the offline channel, which is now a third of the revenue.

Unlike several other DTC brands, the franchise is profitable, with an Ebitda margin of more than 6% in Q1 FY24, which is on an improving trend. The founders (Varun Alagh and Ghazal Alagh) own 35% of Honasa, while the rest is held by external investors.

Investors see the brand as a resounding success on scale, but there are some questions around the steady-state margins due to high marketing spends, Jefferies said in a Nov. 19 note.

"We also believe there is less appreciation for the Umbrella brand, which traverses across the face, body, baby and hair and should drive scale leverage," it said.

"Mamaearth's scale and growth are evident in the fact that turnover added by the brand in the past three years (CY19-22) is almost equal to that added by six leading BPC brands of HUL combined (Glow & Lovely, Dove, Lakme, Pond's, Clinic Plus and Vaseline), as per Euromonitor."

Some investors remain sceptical if Honasa could deliver growth along with optimising ad spend (not absolute but percentage of revenue).

"The extent of drag from new brands was also discussed, but we remain convinced of company Ebitda margins doubling over FY24–26E," Jefferies said. "Prioritising growth over profitability, which we believe is the correct strategy, Honasa reported a 6% Ebitda margin in 1QFY24."

Honasa enjoys a strong 70% gross margin, better than most FMCG companies, given it only operates in the high-margin BPC category and at masstige to premium price points, Jefferies said.

Ebitda margins are still lower, at around 2-6%, with high advertising spends (38–40% of revenue) being a key drag.

"We see a path of steadily improving profitability for Honasa as new brands achieve scale, the channel mix for Mamaearth is optimised further, and operating leverage gains benefits."

Beauty and personal care are likely to grow in double digits, with steady gains expected for the online channel, Jefferies said.

Honasa has a strong online presence in high-growth spaces within beauty and personal care, like skincare, hair care, cosmetics, etc., and at masstige and premium price points, the note said.

Honasa has managed to create a house of brand architecture with six brands portfolio, with salience of Mamaearth down to 65% and revenues of Rs 12 billion in FY23, which puts it in the league of top BPC brands in India, the brokerage said.

Other brands are at different evolution stages and include: The DermaCo (science-based products with active ingredients) and Aqualogica (hydration), which have gained respectable scale, while Ayuga (Ayurveda), BBlunt (professional hair) and Dr Sheth (bio-actives) are at a nascent stage.

Shares of the company rose as much as 6.85%, the most since listing, before paring gains to trade 5.18% higher at 10:33 a.m. This compares to a 0.08% advance in the NSE Nifty 50.

Total traded volume so far in the day stood at 0.6 times its 30-day average.